First Vincent Fernando at Business Insider writes:
The Economic Cycle Research Institute ‘s (ECRI) leading indicator has to have been one of the most abused economic indicators of 2010.
As the ECRI indicator dipped around mid year, bears grabbed onto its decline as a sign of a coming double dip recession, even though the ECRI’s producers themselves made no such pronouncement. It didn’t help that high profile professionals such as David Rosenberg said, “we can safely say that this barometer is now signaling an 80% chance of a double-dip recession.”
Then when the ECRI began to rebound, bears were no longer interested in it.
This complete run around shows what a farce the ECRI has become, not due to its creators, but due to the hijacking of its analysis by others… who didn’t even know how the ECRI was calculated:
Rosenberg and Short are guilty of suggesting big conclusions without properly considering the underlying data. There are two specific problems:
1) The WLI index has an unknown composition. It is unwise to draw big conclusions when you do not understand the relationship. The WLI index itself is, by the design of the makers, a black box.
2) The growth component is some sort of smoothed annualized growth rate in the WLI. We do not know either the nature of the smoothing or the time period for the comparison.
Trying to draw inferences without knowing anything about the underlying data is crazy! It is much wiser to listen to the interpretation from those responsible for constructing and updating the index. How can anyone else think he knows enough to offer a better interpretation? Here is the ECRI interpretation (via Barry Ritholtz).
People were also overly focused on the ECRI’s growth index alone:
To elaborate further, let us look at the full published history of the ECRI data showing both series on the same chart.
The long-term growth in the WLI would not be apparent to those looking only at the growth index. It is deceptive to look at the growth index alone. Again, just to make sure the situation is clear — the ECRI’s creators never said that the declining index was a recession signal
This ECRI debacle reminds us of another ‘leading economic indicator’ that roared to fame, during 2009, and was subsequently forgotten once its movements failed to confirm either the bulls or bears views anymore — the Baltic Dry Index (BDI) for dry bulk shipping.
Remember this one? Raymond James: Can the Baltic Dry Index Serve as A Leading Indicator of Oil Prices?’ Riiight…
We rarely pay attention to blogs (John Mauldin, Barry Ritholtz and Tyler Durden aside) but yesterday yours truly was slammed by one Vincent Fernando (Here’s Why It Was Ridiculous When David Rosenberg Used The ECRI To Predict A Double Dip — nice catchy title).
Well, if the truth be told, if things in the economy are so good and the ECRI was so wrong, why then did Bernanke hint about another major round of QE. No mention in this article, by the way, of how the Fed has now cut its forecast three times in the last four months. The fact that the 10-year Treasury note yield has plunged 150 basis points since April is actually telling you that there is an asset class out there that has responded forcefully to double-dip risks. And, let’s not forget that the Macroeconomic Adviser’s GDP figures show that the economy has contracted in three of the past four months.
It’s always encouraging to find yourself in the company of people you respect. To this end, have a look at the article on page C1 of the WSJ on Bridgewater’s Ray Dalio. To wit:
“One of the nation’s largest hedge funds is emerging as a big winner of 2010, earning its managers and clients billions in profits through a series of bearish bets on the U.S. economy.
Bridgewater Associates Inc. has scored a return of about 38% at its flagship fund, driven in part by a multifaceted wager that the U.S. economy would be in worse shape than many expected and the Federal Reserve would keep interest rates low….”
Then, we see this from Ken Goldstein, the Conference Board’s economist, on page 22 of the FT:
“More than a year after the recession officially ended, the economy is slow and has no forward momentum. The LEI suggests little change in economic conditions through the holidays or the early months of 2011.”
So you see, Vincent, it may not be a “double dip” per se, but stall-speed isn’t really altogether that far away from it either. And guess what? The ECRI actually did nail it!
Now, remember, Rosenberg said ECRI was predicting an 80% CHANCE OF RECESSION, the dreaded “double dip”. Clearly that was wrong. In fact, he is now so desperate that he uses as justification bearish bets some hedge funds have made that paid off. Really? I could have placed large bearish bets on the dollar and won big…..does that mean ECRI is right? Does it? Does it also signal “double dip”? Buying gold could be construed as a bearish bet, does that mean ECRI 80% recession prediction is right?
He also uses Ken Goldstein’s statement, “More than a year after the recession officially ended, the economy is slow and has no forward momentum. The LEI suggests little change in economic conditions through the holidays or the early months of 2011.” OK……”little change” … that means an economy growing (albeit slowly) will still be growing and no “double dip.” That certainly says ECRI’s 80% double dip scenario was wrong….ergo Rosenberg was wrong. He then uses the Fed’s hinted action as proof of his correctness. Here is the flaw in that logic. The Fed will always try to act when they see things slowing, especially in an election year. ANY prediction of recession MUST assume those actions will be taken. Recessions actually happen “in spite of” Fed efforts to stop it. If you are going to claim a recession, you must expect this and you cannot claim victory because it happens. If you actually thought the Fed would do nothing….well…..
So confident was Rosenberg that in August he took it a step further and said “we are in a depression”. This shows a stunning lack of knowledge of what The Depression actually was like…and yes, that was wrong also
He also called for a “negative GDP print in Q4″…… That will be wrong also…
Here is the finale’. “So you see, Vincent, it may not be a “double dip” per se, but stall-speed isn’t really altogether that far away from it either. And guess what? The ECRI actually did nail it!”….. Um, no it didn’t. See how Rosenberg does this? He goes from claiming a double dip is all but assured (80%) to now saying ECRI was right because we are slowing from 5% GDP (Q4 2009) to 2%. But Dave, that is not what you said would happen. “Double dip” means two consecutive Q’s of negative GDP growth, not “things are as great as they could be”. That is more than a significant difference. “Not be a double dip per se“????? Just admit it, things aren’t as bad as you predicted they would be….and you were wrong.
Further in the above linked report he says:
Suffice it to say that there is probably a greater chance that profits go down than meet the consensus estimate, especially considering the deflationary shock out of Europe as well as the tremendous headwind for foreign-derived corporate earnings from the recent surge in the U.S. dollar. So from our lens, slapping on a 12x forward multiple on a range of corporate earnings of $60-75 leaves quite a bit of downside potential in a market that is still priced for too much growth, and 20% overvalued on a Shiller normalized real P/E basis.
So, lets just say it was all wrong? Q2 and Q3 earnings surpassed expectations and S&P earnings will be well ahead of the $60-$75 Rosenberg predicted (should be ~$80 or more). I’m not sure why we have to slap a 12X multiple on the S&P (maybe it just makes his case better??) when it has historically traded well above that.
Bottom line folks? As I have said in previous posts, when prognosticators begin to alter the definition and metrics for which their “predictions” are too be judged, beware. Rosenberg has gone from 80% chance of double dip to now essentially saying he was right because GDP slowed. That is like a sports predictor predicting “The Jets will win the Super Bowl” and then claiming he was right because “Well, they did not win the Super Bowl per se but they finished over .500.″ What the bears do is hold to these predictions until we eventually do have a recession (note: we ALWAYS will have them, they are part of the business cycle) and then do their victory lap.
If the Jets win the Super Bowl 5 years from now, would we let the sports prognosticator above run around and say he “predicted it.” No, we would skewer him for being wrong before and tell him he predicted nothing. OR, if he predicted the Jets would win it every year we would laugh at him with the old “a broken clock is right twice a day” saying. If we would not let him get away with it, why do we let the Rosenberg’s & Roubini’s of the world get away with it? They have been hopelessly wrong for the past 18 months now…..people ought to stop taking what they say as gospel and look at it far more critically.
PS. For the record, I have been wrong many times myself…..difference is I admit it…